What is a Hostile Takeover?

A hostile takeover may not be as intense as it sounds, but it may not be pleasant for all those involved.

It is an acquisition in which the controlling interest of shares in one company has come under the direction of another company, and the newly controlling company has decided to integrate the target company into their operations, which often results in cutting redundant jobs and making other decisions that the target company would probably not have made on its own.

The description as hostile usually stems from the fact that the existing upper management of the target company prefers not to be acquired. Hostile takeovers are a normal part of mergers and acquisitions activity.

They can become highly contentious, however, and have become the battlefield of activist investors seeking corporate changes for political or moral reasons. A takeover can be accomplished by controlling the votes of the board of the directors at a company.

This can be done though a proxy fight, in which, board members being the voting proxies for the shareholders, new board members campaign for election, citing the shortcomings of the current board and enumerating the ways that new board members could benefit the shareholders.

Once a proxy fight has been won, the management of a company can usually be changed along with other modifications such as the decision to join an acquiring company outright.

The other way that hostile takeovers are accomplished is through a tender offer, in which the acquiring company offers to buy a block of shares from a company’s shareholders at a premium to the market price.

Obviously this can require significant capital, but the rules of tender offers permit a company to wait and see if all of the desired shares can be purchased at one time, and if not, they are not required to buy any of them, so there is no chance of a large cash outlay without getting the desired result.

If a target company sees that a tender offer would work, they sometimes acquiesce to the wishes or demands of the acquiring company without the tender offer transaction.

It is also possible to combine the two strategies, acquiring some seats on the board through campaigning and voting and some through a tender offer for shares.

The board of directors at a target company will sometimes do all that they can to avoid being taken over, using such measures as a poison pill clause that can make companies unattractive by triggering a new issue of discounted shares.

What does 'Poison Pill' Mean?
What are Mergers and Acquisitions (M&A)?